He also said a new levy would be raised on bank balance sheets to raise £2bn a year.

Capital Gains Tax basic rate will remain at 18 per cent - those on a higher rate will pay 28 per cent.

VAT will rise from 17.5 per cent to 20 per cent from January.

He said "I am not going to hide any of the difficult choices.

"It (the budget) pays for the past and plans for the future."

Government departments would be cut by £17bn by 2015, he warned.

However, he confirmed that the health service would escape the axe.

He said the jobless total would hit 8.1 per cent this year although would fall over the next four years.

He said CPI would be 2.7 per cent.

Meanwhile Osborne predicted that the economy would grow by 1.2 per cent next year and 2.3 per cent the year after.

He announced a two-year pay rise for the all but the lowest paid of public service workers.

The chancellor also said people at the top of public service should not be allowed to be paid more than 20 times the lowest paid.

He also pledged to make it cheaper for private companies to employ staff.

"I want a sign over the economy which says Britain is open for Business."

There would be four annual reductions in corporation tax, taking it to 24 per cent, he said.

Announcing that the state pension would rise by a minimum of 2.5 per cent a year, he added: "Too often it is the poorest who are hit hardest. This coalition governmnet is a progressive alliance acting in the public interest.

"We have been tough but we have been fair."

But Labour leader Harriet Harman said: "The budget is bad for growth. The budget is bad for jobs. This is a high price to pay.

"Cuts to the value of child benefit ... cutting back free school meals, it's unfair"